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Ideologies, printing money, the Reserve Bank and QE

To the Treasury there are two kinds of QE in SA. One that is ideological and drives inflation; and one that is not

19 May 2020 - 16:34 Dick Forslund

Picture: 123RF/AMIKISHIYEV

Is there such a thing as non-ideological economic policy? The National Treasury and finance minister Tito Mboweni seem to argue against this: the minister, a practising neoliberal, is scientific and objective; his critics are ideological and subjective.

Chris Malikane showed a month ago that the SA Reserve Bank isn’t prohibited by law from lending new money directly to the government, undertaking quantitative easing (QE) or “printing of money” (even if this, today, is done electronically).

He was responding to a March 28 media release from the Bank that falsely stated this would be against the law. What is required of the Bank according to section 13f of the SA Reserve Bank Act, Malikane showed, is to “print” new money in reasonable amounts. To put R276bn into the economy through direct lending to the state, was, for example, the legal limit in March 2019. At that time this was the sum of the Bank’s capital, reserve fund and a third of its liabilities, according to the annual report.

R276bn is more than half the R500bn the Treasury argues is the size of its “stimulus package”. In a later article, Malikane argued that it is very doubtful if “printing money” in the current lockdown situation will result in “too much money” chasing “too few goods”, as Bank governor Lesetja Kganyago reported from a monetary policy committee meeting at the end of April.

You realise, however, that to the Treasury there are two kinds of QE in SA. One that is ideological and drives inflation; and one that is not. If the Bank creates new money and lends directly to the Treasury for managing deficits in the national budget — when running the public-service sector with the tax revenue plummeting and paying out R50bn in extra social grants — then it is wrong, ideological, and will drive inflation.

But if the Bank creates R100bn to R200bn out of nothing for the loan guarantee scheme and lend the amounts to commercial banks — which they lend to private-sector companies at a regulated interest for the purpose of paying workers, suppliers and landlords — then it is not an ideological measure and will not drive inflation.

Has anyone ever heard of a government bailing out its own central bank using the public purse? It is not impossible that we will live to see it

The game of smoke and mirrors has gone so far so that on April 27 the finance minister fended off a question by a journalist on why the Bank cannot buy state bonds directly from the Treasury by saying the question itself was “ideological”. He said: “The issue about printing money ... Let me just say, we are not in that business. So therefore the question has not really arisen in our heads. After we have provided such an elaborate explanation about how we are going to source funding, we still want to print money? It’s again that ideology that you designed before I spoke about the mechanism for raising funding, so I am not really interested in that answer.”

But the loan guarantee scheme launched jointly by the Treasury and the Bank cannot but use R100bn to 200bn created out of nothing by the Bank, as central banks sometimes do. The finance minister is in the money-printing business that he pretends he is avoiding. The difference to what Malikane and others have suggested time and again as one of the measures to take in this crisis, is that the finance minister uses the private sector as the outlet for the new money, not the public sector that he doesn’t like.

The loan guarantee scheme has another peculiar feature. If the commercial banks default on the loans they get from the Bank — maybe the companies they lend to do not pay them back — then the Treasury will bail out the Bank using the national budget: the same budget that is supposed to finance the public-service sector, the social grants system, and public infrastructure investments.

In such a case the Bank will be bailed out by taxpayers; cuts in public programmes are more likely under this government than tax increases for the middle-class and rich.

In other words, our central bank will be reimbursed by the public for “losing” money the Bank did not have in the first place but could “print” at will, within limits set out in the SA Reserve Bank Act. Has anyone ever heard of a government bailing out its own central bank using the public purse? It is not impossible that we will live to see it.

The reason for this bizarre threat of a possible bailout of the central bank — anchored in an intellectual meltdown and a double ideological and moral standard — is that lending new money to the government directly from the Reserve Bank would contradict a key element of the finance minister’s grand plan — “structural reforms”, which is to diminish the size of the public sector as a share of the whole economy.

But printing money, R100bn in a first tranche, and lending it to the commercial banks for further lending to the private sector, does not contradict this plan for the future of the public service. The Covid 19 lockdown crisis arrived a little inconveniently for the Treasury, but if you are clever there is always a way.

• Forslund is senior economist at the Alternative Information and Development Centre.